As per RBI regulations, gold loans are restricted upto 75% LTV. This means that if a customer provides 1 lakhs Rs worth of gold jewellery as collateral, then he can avail himself to a maximum of 75000 loan. In fact, as per RBI guidelines, only the value of raw gold can be used in calculating LTV – so, other value add in the jewellery like making charges, gems, diamonds, etc do not contribute to the calculation of LTV. So, in reality the value of the jewellery may be 1.2 lakhs, but the customer can avail only a maximum loan of 75000.

The gold jewellery is handed over to the custody of the gold financing company. Thus, in case the customer fails to repay the loan – then the gold financier doesn’t have the headache of having to send recovery agents to recover (e.g. anyone seen the goondas who are sent to recover 2/4-wheelers when customers default on auto loans?)

Gold is traditionally an appreciating asset. Thus, if a customer fails to repay his loan – then the company is allowed by RBI to auction the gold jewellery after waiting for a fixed number of days (If I remember correctly, it is 6 months). Typically, by the time of this auction the gold jewellery has appreciated in value, because of rising prices of gold.

Testing of purity of gold is very easy – the gold jewellery is dipped in acid solution for a few minutes. If it is real 18+ carat gold, it won’t corrode. So, chances of being defrauded with fake jewellery is very low (If fake jewellery is accepted as collateral – it is almost certain that the company’s official is a party in the fraud).

Muthoot Finance has a large internal vigilance department, which is almost entirely filled with retired senior police officials. This helps in two ways (1) the guys are extremely good at investigating any employee fraud (2) these guys are well connected to the police department, so they are able to ensure that anybody defrauding the company gets punished.

The gold jewellery accepted as collateral is stored in the respective branch of Muthoot Finance in strong-rooms – this is required by RBI regulations. I have been told by knowledgeable people that the strong-rooms of Muthoot Finance is more robust than that of most banks. Since, the gold jewellery is not transported from any of the branches (e.g. to a regional office), the risk of burglary in between transit is almost not there. Also, even if a burglary is done in a branch – the risk is low – as each branch is holding only about 5 – 6 crore worth of gold jewellery (20,000 crore worth of gold jewellery across 4000+ branches). There are no systemic risks in terms of gold storage/transit.

Indians (especially the womenfolk) have high emotional attachment to their gold jewellery. So, it is unlikely that customers would default on their gold loans, as they would lose their treasured gold jewellery.

Gold financing is mainly availed by small/medium entrepreneurs and lower income people who need emergency cash (e.g. to meet hospital expenses, etc). The average loan ticket size is small – in the case of Muthoot Finance it is less than 50 thousand Rs. So, it is mostly availed by marginal folks (unlike the Vijay Mallyas who take gigantic loans and manage to not repay these loans with the help of his army of highly talented lawyers)

Any risk in lending to marginal folks is compensated by the ability to charge higher interest rates. Muthoot Finance charges interest rates of between 12% and 24%, depending on the riskiness of the loan. (E.g. a customer availing a loan at 50% LTV, is charged a lower interest rate than a customer availing a loan at 75% LTV). Thus, there is inbuilt safety as a few defaulting customers are compensated by many highly profitable customers.

Gold financing in general is less risky that every other form of financing
(1) Infrastructure financing – highly risky, as infra projects have long gestation periods and questionable viability
(2) Micro-financing – highly risky as it involves lending to marginal folks without any collateral
(3) 2-wheeler financing – highly risky mostly availed by young college passouts, with questionable incomes.
(4) 4-wheeler financing – risky as in case of default, it is difficult to recover the vehicle, and often the resale of the (depreciated) vehicle doesn’t fetch enough money to recover the dues from the defaulting customers
(5) Commercial Vehicle financing – very much linked to economic cycles, as truck fleet operators have low utilization (and profits) during economic down-cycles
(6) Housing loans – risky as real estate is highly illiquid in bear cycles. Defaults in housing loans typically happen in bear cycles (why would anybody default on a housing loan if the price of the house is rising fast as in a bull cycle). Banks/NBFCs are unsuccessful in auctioning/disposing off real estate during bear cycles, when real estate transactions die down to a whimper
(7) Working capital / short term bridge loans – medium risky (risk mainly due to lending without collateral)
(8) Long term loans to corporates – Risky, as many corporates flex their political connections to avoid repaying

The key risk in gold financing is a catastrophic fall in gold prices. In 2013, gold prices fell by 30% (in US dollar terms) in the global market. In India the fall in gold prices was far less (only about 15% in INR terms), due to falling Rupee, as well as increased customs duties (Note that a very high proportion of India’s gold needs are met by imports).

To understand why a fall in gold prices is risky – imagine a gold loan availed against Rs. 1 lakh worth gold as collateral. Including making charges, etc. the price of the jewellery may by 1.15 lakhs. The customer avails a loan of Rs. 75K against this piece of gold jewellery.

Typically gold loan companies charge an interest of between 12% - 24%. Thus by the end of one year, the customer has to pay back an amount of Rs. 90K (assuming 20% interest rate). If the price of gold has fallen by 30% in the meantime, then the customer may start thinking that he is better off not repaying the gold loan, and forfeiting his gold jewellery.

The key question to ask here is how likely is it that the gold prices would fall by 30%? Especially considering that it already fell by 30% in 2013 (very recently). I have done some basic research on the gold prices – and I came to the conclusion that gold prices have fallen significantly only in 2 years in the last 100 years. The 30% fall in 2013 was after a gap of 30 years (the previous crash being in 1983). If gold prices fell every now and then – would it be considered a safe haven asset? In both 1983 and 2013, the gold price crash followed a huge bullish run up in gold prices in the preceding years – so it was more in the form of a correction (as the prices had risen far above the fundamentals).

Investors are often prejudiced by ‘recency bias’. Since, the 30% fall in gold prices is very recent and fresh in the memories of investors – they keep expecting that gold prices will fall again. I have been hearing doom-and-gloom stories about gold since 2013 uptill today – but the reality is gold price has remained steady ever since its fall in 2013.

In 2013, global gold prices fell by 30%. This must have been catastrophic for Muthoot finance (and other gold loan financiers). Some of the customers started defaulting on paying back their gold loans.

To make things worse - Out of consideration for the systemic risks posed by falling gold prices, RBI imposed a series of restrictions on gold loan NBFCs. This was a double whammy. Among the many restrictions - the most serious one was that gold loan NBFCs were restricted to a maximum LTV of 60%. This meant that a customer could avail a maximum of 60,000 Rs loan against jewellery worth Rs. 1 lakh.

Since unorganized players and banks were not burdened by the same restrictions, and could give loans with any LTV as they liked - this created an uneven playing field to the disadvantage of gold loan NBFCs. Gold loan NBFCs (including Muthoot Finance) started losing customers, as the customers would go to an unorganized player / bank and get Rs. 75K or Rs. 85K against his Rs. 1 lakh gold jewellery.

Faced with this double whammy, it is important to see how Muthoot Finance coped up - and the quality of the business can be judged from the same…

(1) The low credit losses despite the falling gold prices - implying that even when customers defaulted, Muthoot Fin was able to negotiate with them and get them to repay a discounted part of loan (principal+interest). For customers who absolutely refused to repay, Muthoot Fin was able to get good prices by auctioning the gold jewellery.

(1) The low shrinkage in the gold loan portfolio of Muthoot Finance despite these restrictions - implying that Muthoot Fin has a largely loyal customer base, and not too many customers walked away. Most gold loans of Muthoot Fin are given for a period of 1 year or lesser. So, the gold loan portfolio churns very fast. If customer loyalty was absent - then in the face of much lower LTV, most of the customers would have walked away (as high LTV is one of the primary expecations of customers).

It is important to note that the unfavorable restrictions placed by RBI have since been removed and now there is a level playing field for gold loan NBFCs, Banks and unorganized players (Eg. Banks and gold loan NBFCs and unorganized players are all restricted to a uniform maximum LTV of 75%). The level of regulations has gone up since 2013, and this is an advantage for large players like Muthoot Finance, as the regulations stop unfair competition from unorganized players (who often engage in highly risky lending even upto LTV of 90%)

There is a huge entry barrier in the gold loan business - as a customer is very unlikely to entrust his gold jewelry into the custody of an unknown entity. It requires a lot of trust, that takes decades to build. Muthoot family has been into financing for more than a century - and they have built their business on this huge legacy of trust. It is very difficult to replicate - and it is very unlikely that any of the unorganized players will become a challenger to Muthoot Fin in the next 10 years.

Among the large gold loan NBFCs (Muthoot Finance, Manappuram Finance, Muthoot Fincorp) - Muthoot Finance has the largest branch network, is generally more trusted and better managed (I will get into management quality in a short while).

The large branch network of Muthoot Fin (4200+) is also a competitive advantage - with most of the branches being in semi-urban / semi-rural areas, which are not well networked/serviced by banks. Most banks would find it unprofitable to be present in these areas.

The low cost branch network of Muthoot Fin is another competitive advantage - most branches are located in places with cheaper rentals, are not air conditioned, the employees are paid lesser (as their job responsibilities are far more basic than that of a bank employee). Banks are highly unlikely to be able to match the cost structure. Having a low cost structure is not a luxury, but a necessity for gold financing. Because the loan ticket sizes are low (average loan ticket sizes being less than 50K), the transaction and processing costs would make it unprofitable, unless done in the most cost effective manner possible. This is the reason why hardly any bank focuses on gold loans (except agricultural gold loans - which is a different category, and I will come to that later)…

Another competitive advantage is socio-cultural. Muthoot Fin almost entirely serves lower income folks. A lower income person doesn’t feel comfortable in the air-conditioned branch of a bank. He immediately senses that the bank staff are far more interested in serving the other middle income and upper income customers waiting with him at the branch. He knows that he is not the priority of the bank staff. Muthoot Fin on the other hand solely serves customers like him. So, he is treated with respect and valued at a Muthoot Fin branch.

Another competitive advantage is regulatory. Gold loan NBFCs are allowed to provide bullet loans. A bullet loan is when the principal (and also interest?) can be repaid at the end of the loan tenure. Banks are not allowed to do so - banks strictly have to collect loan repayments as EMIs. The main reason why customers take gold loans is because of need for emergency cash - and they often don’t know when they would be able to repay it. Thus, bullet repayments work best for such customers.

There are also other regulatory advantages in terms of how provisioning should be done, etc. But perhaps not required for this discussion.

Another competitive advantage is the fast processing done by Gold loan NBFCs. Most often banks won’t provide a gold loan to a customer unless he is already a bank customer and the bank has access to his banking transactions data (with which the bank is able to judge if the person can repay the EMIs). Gold loan NBFCs don’t have any such requirements. They typically can close the loan granting process in less than 20 mins.

The only big competitive disadvantage is that banks have access to cheaper funds (due to having low-cost CASA deposits). So, banks are able to give cheaper gold loans (11% - 16% interest rate) vis-a-vis Muthoot Finance (12% - 24% interest rate). In practice, customers who need long-term loans tend to go to banks, while customers who need short-term loans (less than 1 year) go to Gold loan NBFCs. The rationale being that if you are taking a 40K loan for less than a year, then a few extra % of interest rate hardly matters. Gold loan NBFCs also allow early repayment (partially or full) without any penalty, so customers really don’t mind the higher interest rates.

It is very difficult to ascertain management quality – but all the indicators I have so far are positive, and I have detailed it below

I have done a lot of scuttle-butt and asked many employees, and even neighbours of the Muthoot Finance family. To judge promoter integrity - I typically ask people if the promoters are more like the Tatas (with lots of integrity) or more like Ambanis. Not even one person I have asked this question to, have told me that the promoters are more like Ambanis. Everyone thinks they are more like Tatas. However, everyone also had a negative perception about the business model (and not about the promoters), as they empathize with people who lost their jewellery assets after taking loans from Muthoot Finance.

In 2013, RBI had placed various restrictions on all gold loan NBFCs which restricted their ability to grow (These restrictions were later withdrawn). Muthoot Finance management paid out huge dividends during the period when these restrictions were in place – this indicates to me that when the management saw no growth opportunities, they were willing to share the excess cash with shareholders rather than hoard the cash. (Note: It is a financing business with Capital Adequacy Requirements - CAR. So, typically managements prefer to increase the equity+reserves base to be able to grow the loan book. Dividends are only paid out if their excess cash even after growth needs).

In 2013, when gold prices fell by 30% - gold loan NBFCs were left with a substantial amount of toxic assets - gold loans which were not repaid by customers. I noticed how Manappuram Fin and Muthoot Fin went about treating the toxic assets. Manappuram Fin immediately auctioned off the gold jewellery of defaulted customers, taking quite a hit on profitability in the process. Muthoot Fin went about it in a much better way. They contacted each of these customers and negotiated discounts with them - to incentivise them to repay. Most customers repaid once they were given a discount, as they had sentimental attachement to their gold jewelry. So, Muthoot Fin had far lesser (and almost negligible credit losses) compared with Manappuram Fin.

In 2012 and 2013, Muthoot Fin had hired Mckinsey and Co to consolidate their business and redesign their processes.

The cost-to-income ratio of Muthoot Fin is far better than Manappuram Fin, thus show that the management is conservative about its finances.

Muthoot Fin went through a difficult time in 2013 and 2014, due to fall in gold prices + RBI regulatory actions. The quality of business can be judged from the fact that despite these adversities, the company was highly profitable and managed a RoE of 15% even in the worst of times (Note: Very few banks / NBFCs have a RoE of 15% even in normal times).

Gold prices have now stabilized. And RBI regulatory restrictions have now ceased.

Muthoot Fin is slowly getting back to growth, with gold loan portfolio growing from the bottom of 21300 crores (Q1 FY15) to 23300 crores (Q4 FY15). Management foresees 15% growth in loan portfolio in FY16. Since this can be achieved without increasing no. of branches, the escalation in costs would be low. Thus most of this growth will flow into the bottom-line.

Muthoot Fin is well capitalized. It is a quality business which could survive the worst of shocks. It has strong, sustainable competitive advantages. RoE should recover to 25% or more in FY16. Yet, it is valued at less than 1.5x BV.

Compare this with a far riskier business (housing loans to self-employed/lower income folks) with low returns (and questionable competitive advantages) like Repco Home Finance which is valued at 5x BV…

Looking to hear back on this thesis… Glad to share any further thoughts I may have…

The issue with muthoot and manappuram have been several governance red flags

one promoters charge 1 % of profits for use of muthoot brand which is unheard of. they own the brand in their personal capacity - muthoot finance advertises for it, builds the brand and the promoters use the brand in their personal capacity in other businesses. This is ridiculous to say the least

their pay is very high - more than 6- 7% of the net profits of the company

My own scuttle butt shows a fairly significant red flag - the company uses pirated versions of windows and does not believe in purchasing legal software. this could be small but to me, this is an indication of the promoter’s mind set.

in 2012, muthoot used its branches to collect deposits for its other promoter group company

Muthoot also has several group companies - including in agriculture etc. and transfer of funds across these companies through a porous membrane is quite common.

a lot of analysts have stopped covering muthoot finance citing opaqueness in numbers. type governance issues on muthoot and you will know what I mean. The analyst of a reputed investment bank who was covering the company, confided to me that the company started treating them with scant regard during the glory days of 2011 and 2012 and called them all back to help them improve their image once all this chicanery surfaced post RBI’s intervention in 2012 (using branches to collect deposits, using those deposits for their personal business etc.) and they could not answer a lot of questions about underlying numbers.

This is my view- I infact, held on to manappuram last year and sold after a rally once I ffigured these questions were difficult to understand

Firstly the company being discussed is listed Muthoot Finance Limited (MFL) and NOT Muthoot Fincorp, there exist a sea difference between the two. Highlighting this upfront because ICRA link shared above corresponds to Muthoot Fincorp

Regarding promoter charging some % of PAT/turnover for the BRAND. Will like to share that this does not happen in MFL as of now. However promoter has clearly mentioned his intention to do something like this, way back in 2011 and continues to maintain his stance even till Mar, 2015 (latest available info.).
Why they were not able to do it - legal tangle, much of it available in company fillings
Is this practice Bad? – My personal opinion, life could have been much better without it but never the less, it’s not a deal breaker till the time - amount charged is rational and business performance is maintained
Is this something new/ practiced by promoter of bad pedigree – I doubt, since some reputable business houses follow such/similar practice. To name a few – Tata, Shriram, Future, JK etc.

For MFL, promoters pay has been constant for the last 6 years. In FY10/11 – if you would have raised this issue, it would have been perfectly accepted

Promoter group company, transfer of funds, deposit collection – Go through the RBI paper on “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs” – will give you a good perspective on whose business practices were questionable and who was doing it right.

Regarding numbers and reporting practices – in my analysis, I was able to extract 95% of data (and associated details) which I would require to analyze business of such nature with quite a ease.

I have lot to add, but will restrict here. My purpose of sharing this, is neither a debate nor a counterview – this is something which I got to know after a lot of untangling and hope would be useful 

@ PP1 – Comprehensive post and nicely done, just one observation worth mentioning – In the near term ROA will be pegged at 3 - 3.25% and leverage will hover 4.5 – 5x, unless something changes drastically. So ROE in the short term will imbue at a lower level but yes, the business economics has the potential to take it much higher.

Lastly, just 2 cents of my own – it’s a typical case (industry/company) where there exist a lot of misperceptions and little bit of effort, will make things much different. There are many risks attached with the business but they are overtly generalized somehow.

The promoters of Muthoot Fincorp are different. Promoters of both the companies are related - they share their grandfather.

However, Muthoot Fincorp and Muthoot Finance are fierce competitors. They have no dealing with each other.

Muthoot Finance is the no.1 gold loan company in India.
Muthoot Fincorp is no.2
Manappuram is No. 3

The general word on the street is that Muthoot Fincorp doesn’t have the best governanace standards. I know this through anecdotal evidence (as well as through some expert opinion that has been shared with me). However, there is no reason to extrapolate that to Muthoot Finance, as they are unrelated businesses.

I agree that there exists a lot of misperception about the gold loan business altogether. Most people fail to differentiate between the unorganized gold pawning player and the organized gold loan NBFCs.

Gold pawning players are small shops who charge shark loan rates (40% or higher) and often take their customers for a ride. Quite often they are known to abscond with the gold jewelry of customers. They are notorious for justifiable reasons.

Gold loan NBFC business is an organized business, tightly regulated by RBI. It is important to understand the genesis of the organized gold loan industry. Till early 2000s, gold loan business was regulated by the state govts. under the Money Lenders Act of each state. To put it approximately, the state Money Lending Acts dictate a (low) ceiling on the maximum rate of interest which can be charged by any money lender - In Kerala’s Money Lenders Act this ceiling is set at 12%.

It is impossible to run a gold loan business charging only an interest rate of 12%, mainly because the ticket size is very low (typically average ticket size of less than 50K) leading to high transaction/processing costs. This meant that anybody in the gold lending business had to do it under the radar and away from the eyes of law (and as a result the gold pawning industry became a notorious place).

All this changed in early 2000s, when RBI started regulating gold loan business - allowing players a free hand to charge interest rates (essentially letting the market determine interest rates). This allowed the emergence of organized and legal gold loan NBFCs, operating very much above the law. In the early years, there was turbulence - as many state govts tried to continue to impose the state’s Money Lenders Act on these NBFCs. There were court cases in the High Courts of many states (IIRC - Gujarat, TN, Kerala, and few others), and in everyone of these cases, the High Courts held that a NBFC regulated by RBI (as allowed by RBI Act of Parliament) cannot be superimposed by a state Act - holding the primacy of Parliament above State Assemblies as enshrined in our Constitution.

Today, Muthoot Finance charges interest rates between 12% and 24%, with the average interest rate being around 20%. This high average interest rate reflects both the higher transaction/processing costs of gold lending business, as well as the huge pricing power (and competitive moat) it enjoys.

Another factor which can give comfort is that even today, more than 70% of gold loans are provided by Banks, with every Bank including HDFC, ICICI, SBI, PNB, etc etc having substantial gold loan portfolios.

Gold loan NBFCs are slowly eating into market share of banks, even as the size of the gold loan industry is also growing.

If you think about it in a contrarian manner, all the misperceptions about gold loan NBFCs is a big opportunity - because it is the main reason why the stock is available at a cheap valuation. The same applied to the alcohol industry couple of decades ago - which meant that companies like United Spirits, United Breweries ended up being 1000x multi-baggers.

Muthoot also has several group companies - including in agriculture etc. and transfer of funds across these companies through a porous membrane is quite common.

a lot of analysts have stopped covering muthoot finance citing opaqueness in numbers. type governance issues on muthoot and you will know what I mean. The analyst of a reputed investment bank who was covering the company, confided to me that the company started treating them with scant regard during the glory days of 2011 and 2012 and called them all back to help them improve their image once all this chicanery surfaced post RBI’s intervention in 2012 (using branches to collect deposits, using those deposits for their personal business etc.) and they could not answer a lot of questions about underlying numbers.

in 2012, muthoot used its branches to collect deposits for its other promoter group company

You have probably written this about Muthoot Fincorp and not about Muthoot Finance.

Muthoot Finance is not a deposit taking NBFC. Deposit-taking NBFCs have a different type of registration with RBI.

Muthoot Finance does raise funds from the public - in the form of NCDs (Non-convertible debentures). Their ability of raise more than 1000 crores from public in FY15 in the form of NCDs (I think it was 1600 crores in FY15, but need to recheck) shows the trust they have built in the eyes of the public.

Please note that NCDs are debentures and not Deposits. I have done quite some scuttle-butt on this. I have personally visited 4-5 Muthoot Finance branches, and told the branch officials that I would make a deposit. In each of these branches I was told very clearly that it is not possible to make deposits, but I could subscribe to NCDs. It was also explained to me that subscribing to NCDs required me to open a Demat account (if I didn’t already have one) and they would help me with opening the Demat account.

RBI’s regulatory regime for gold loan NBFCs has tightened and standardized over time - this always plays to the advantage of the larger, organized players like Muthoot Fin (as it deepens their competitive moat).

My own scuttle butt shows a fairly significant red flag - the company uses pirated versions of windows and does not believe in purchasing legal software. this could be small but to me, this is an indication of the promoter’s mind set.

Varadarajan, you are probably writing this about Muthoot Fincorp and not about Muthoot Finance.

Muthoot Finance has quite sophisticated IT setup, having even implemented Core Banking Solution (CBS). The IT setup was practically setup with all the abilities to function as a full-fledged bank (as Muthoot Fin had unsuccessfully applied for a banking license in 2014).

varadharajanr:

their pay is very high - more than 6- 7% of the net profits of the company

Looking at the FY14 Annual Report of Muthoot Finance

Salary to Directors - 7.2 crores
Profit After Tax - 780 crores

So promoters are paying less than 1% as salary to themselves. This is easily within normal limits.

Mayank_7772:

@ PP1 – Comprehensive post and nicely done, just one observation worth mentioning – In the near term ROA will be pegged at 3 - 3.25% and leverage will hover 4.5 – 5x, unless something changes drastically. So ROE in the short term will imbue at a lower level but yes, the business economics has the potential to take it much higher.

The ROA came down to 3% levels from 4%+ levels only due to RBI regulatory actions which caused shrinkage in loan book. Because the profits kept adding to the asset base, while the loan book de-growed - the ROA reduced.

Now, the loan book growth has restarted (as can be seen in latest 2 quarters), and the capitalization is quite high - 25% CAR (implying ability to grow the loan book far higher) – I think it is not difficult for the ROA to return back to 4% levels.

Just do this basic calculation - if loan book grows by 15% (as projected by management) in FY16. Then the loan book grows from 23,300 crores to 26,800 crores (that is a growth by 3500 crores) . The company earns net interest income of 9.5% on the extra loan book - that is the net interest income goes up by 330 crores. Since the loan book growth is planned to be achieved without any increase in the number of branches, there are no higher operating costs incurred. Thus, most of this 330 crores (after deducting taxes @34%) will flow into the bottom-line. Which means the PAT would be around 890 crores in FY16 vs. 670 crores in FY15.

That implies a ROA of 3.6% in FY16. Since the company has the ability to further leverage (due to high CAR of 25%), the ROA should reach back to 4% in FY17

Thanks for the great info on the business model. Went through the website of muthoot and they seem to have other services as well like
a) Foriegn Exchange(Even Manappuram seems to have this)
b) Traveljango
and
c) Wealth Management Services.(The link says they have some tieup with icici etc. Most likely seems like a referral model where they refer their customers to icici and gain commission ?)

They seem completely unrelated to their core gold loan business atleast b) and c) above… Do you have any idea on when they started these services, how much these are contributing to the top line? Why are they even in b) and c)?

I will try to find these out myself over the next weekend by visiting a nearby store. But wanted to check if you have already thought of the above.

Management Services.(The link says they have some tieup with icici etc. Most likely seems like a referral model where they refer their customers to icici and gain commission ?)

They seem completely unrelated to their core gold loan business atleast b) and c) above… Do you have any idea on when they started these services, how much these are contributing to the top line? Why are they even in b) and c)?

I will try to find these out myself over the next weekend by visiting a nearby store. But wanted to check if you have already thought of the above.

Haven’t done a lot of research on their other businesses… They have a lot of other businesses than the couple you have mentioned…

E.g. They are a business correspondent for Yes Bank…
E.g. Recently they started (affordable) Housing Finance… (Muthoot HomeFin - it is a subsidiary company)…
E.g. They even have a tiny (wind?) power generation business…

All of these businesses (except the wind power generation business) are attempts to leverage their 4200+ branches to generate extra income…(without incurring any extra costs - the existing employees at the branches are enough to serve the customers of these additional businesses)

However, I don’t understand where your concern is…

Do you think there is a conflict of interest here?

Why do you think that these are unrelated businesses (Check out Kotak Mahindra Bank who provides an entire bouquet of financial services apart from pure banking)…?

Do you think that resources (capital expenditure, operating costs) are being wasted on these businesses?

The only concerning thing may be their power generation business… But it is a super-tiny business, if you check out FY14 numbers in their annual report

George Alexander Muthoot, Md & Oommen K. Mammen, CFO add the call:Highlights by Capital Mkt
The company exhibited accelerated loans growth to touch a level of Rs 24409 crore at end June 2015. The revenue growth also increased, while cost-to-income ratio has shown improvement in Q1FY2016.The average LTV on gold loan book stood at 71% at end June 2015.The number of gold loan accounts increased to 65 lakh at end June 2015 from 62 lakh at end March 2015 and 56 lakh at end June 2014.The company expects loan book growth at 10% for FY2016, while it is likely to relook at its loan growth target after September 2015.
As a prudent provisioning policy, company is maintaining a higher standard asset provisioning of 0.5% against regulatory requirement of 0.25%.The credit cost for the company stood at Rs 3 crore in Q1FY2016.During the quarter, the company has introduced the facility for online payment of interest for gold loan customers, which is receiving good response.The company has also activated gold loan business in the subsidiary company in Sri Lanka, where the company is expecting a good potential for growth. The Sri Lanka subsidiary has built a gold loan book of Sri Lankan Rs 20 crore, since inception. The gold business is operational through seven branches in Sri Lanka.The company has maintained the cost of borrowing steady at end June 2015, while it is expecting a decline in borrowing cost moving ahead.On margins front, the company proposes to maintain NIMs in the range of 9-9.5%, while also proposes to maintain RoAs in the range of 3.00-3.25%.On ATMs business front, which is likely to take longer to achieve break even, the company is not aggressive on expansion. Currently, about 200 ATMs are operational, which contributes to brand building of the company.On housing finance business, the company is yet make capital infusion in the subsidiary company.

So more than 14% loan book growth Y-o-Y, and consistent growth in loan book over the last 4 quarters. The turnaround seems to be going smooth. The loan book growth should increase to 20% starting next quarter, as per management.

10% PAT growth Q-o-Q, which should accelerate to 20% or more by Q4.

Expect the stock to re-rate. Currently, it is valued like a zero growth stock (PE of 11).

The downward pressure on the stock is due to the fear of fall in gold prices, due to Fed interest rate hike (as investors may sell gold, to invest in debt). This pressure should go away to a large extent by Sept (when Fed rate hike is expected).